International economics
Chapter 1 – 8
Chapter 1; trade in the global economy;
A country’s trade balance is the difference between its total value of exports and its total value of
imports (usually including both goods and services)
Trade surplus; export > import
Trade deficit; import > export
Horizontal FDI; when a firm from one industrial country owns a company in another industrial
country.
Vertical FDI; when a firm from an industrial county owns a plant in a developing country.
Chapter 2; trade and technology: the Ricardian model:
Why do countries trade good with one another:
Difference in the technology used in each country.
o Absolute advantage; when a country has the best technology for producing a good.
o Comparative advantage; a country has comparative advantage in producing those
goods that it produce best compared with how well it produces other goods.
Difference in the total amount of resources found in each country. (Labour, capital, and land
= called factors of production)
o Natural resources; such as land and minerals.
o Labour resources; labour of various education and skill levels.
o Capital; machinery and structures.
Differences in the costs of offshoring.
The proximity of countries to one another.
o Free-trade area; in which the countries have no restrictions on trade between them.
Ricardian model: this model explains how the level of a county’s technology affects the wages paid
to labour, such that countries with better technologies have higher wages.
This , in turn, helps to explain how a country’s technology affects its trade pattern, the products that
it imports and exports.
Suppose that both goods are produced with labour alone.
Marginal Product of Labour (MPL); the extra output obtained by using one more unit of labour.
Production possibilities frontier (PPF); A straight line between these two points at the corners.
QX = MPLX * LX
Slope = - (MPLX/MPLY)
The slope is also the opportunity cost of X. the amount of Y that must be given up to obtain
one more unit of X.
Indifference curve; shows the combinations of two goods, such as X and Y, that a person or economy
can consume and be equally satisfied.
The indifference curve is associated with a given level of satisfaction, or utility.
Chapter 1 – 8
Chapter 1; trade in the global economy;
A country’s trade balance is the difference between its total value of exports and its total value of
imports (usually including both goods and services)
Trade surplus; export > import
Trade deficit; import > export
Horizontal FDI; when a firm from one industrial country owns a company in another industrial
country.
Vertical FDI; when a firm from an industrial county owns a plant in a developing country.
Chapter 2; trade and technology: the Ricardian model:
Why do countries trade good with one another:
Difference in the technology used in each country.
o Absolute advantage; when a country has the best technology for producing a good.
o Comparative advantage; a country has comparative advantage in producing those
goods that it produce best compared with how well it produces other goods.
Difference in the total amount of resources found in each country. (Labour, capital, and land
= called factors of production)
o Natural resources; such as land and minerals.
o Labour resources; labour of various education and skill levels.
o Capital; machinery and structures.
Differences in the costs of offshoring.
The proximity of countries to one another.
o Free-trade area; in which the countries have no restrictions on trade between them.
Ricardian model: this model explains how the level of a county’s technology affects the wages paid
to labour, such that countries with better technologies have higher wages.
This , in turn, helps to explain how a country’s technology affects its trade pattern, the products that
it imports and exports.
Suppose that both goods are produced with labour alone.
Marginal Product of Labour (MPL); the extra output obtained by using one more unit of labour.
Production possibilities frontier (PPF); A straight line between these two points at the corners.
QX = MPLX * LX
Slope = - (MPLX/MPLY)
The slope is also the opportunity cost of X. the amount of Y that must be given up to obtain
one more unit of X.
Indifference curve; shows the combinations of two goods, such as X and Y, that a person or economy
can consume and be equally satisfied.
The indifference curve is associated with a given level of satisfaction, or utility.
